Leverage Ratio
Private Credit glossary · Underwriting & Credit Analysis
Definition
Total Debt / Adjusted EBITDA — the single most-watched credit ratio in direct lending. The maintenance leverage covenant tests Total Debt/EBITDA_TTM ≤ L_max each quarter, typically with a 25%–50% cushion above closing leverage and a step-down schedule (e.g., 5.75× to 5.50× to 5.25× to 5.00× over Years 1–4) that forces deleveraging through EBITDA growth or principal paydown.
Leverage Ratio in plain English
The leverage ratio answers one blunt question: how many years of a company's profits would it take to pay back everything it owes? You calculate it as total debt divided by 'EBITDA' — a rough stand-in for yearly profit (earnings before subtracting interest, taxes, and accounting wear-and-tear). If a company owes $50 million and earns $10 million a year, that's a 5x leverage ratio — like owing five years' salary. Lenders watch this number obsessively and often write a rule into the loan (a 'covenant') saying the ratio must stay below a set ceiling each quarter — a ceiling that usually ratchets down over time (say from 5.75x toward 5.00x), pressuring the company to either grow its profits or pay down debt so the loan gets safer year by year.
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